CHAPTER 1

SUGGESTED ANSWERS
EXERCISES
Exercise 1 - 1
1.
Direct cost
2.
Direct cost
3.
Indirect cost
4.
Cost of issuing and registering securities
5.
Cost of issuing and registering securities
6.
Cost of arranging and registering debt
7.
Cost of arranging and registering debt
8.
Indirect cost
9.
Direct cost
10.
Indirect cost

Expense
Expense
Expense
Reduction in additional paid in capital
Reduction in additional paid in capital
Bond issue cost
Bond issue cost
Expense
Expense
Expense

Exercise 1 - 2
Consideration transferred (10,000 sh x P120)
Fair value of net assets acquired
Goodwill

P1,200,000
450,000
P 750,000

Exercise 1 - 3
1. Consideration transferred
FMV of net assets acquired
Gain on Bargain Purchase/Negative Goodwill
2.

Negative goodwill is recognized in the profit or loss.

Exercise 1 - 4
1. Assets
Goodwill
Liabilities
Ordinary Share Capital (325,000 x P10)
Paid-In Capital in Excess of Par (325,000 x P5)
Consideration transferred (325,000 x P15)
FMV of net assets acquired (P6,000,000 - P1,675,000)
Goodwill
2.

P 500,000
600,000
P 100,000

Assets
Goodwill
Liabilities
Ordinary Share Capital (475,000 x P5)
Additional Paid-in Capital (475,000 x 7)
Consideration transferred (475,000 x 12)
FMV of net assets acquired (P10,000,000 P4,525,000)
Goodwill

Exercise 1 -5
Requirement 1

6,000,000
550,000
1,675,000
3,250,000
1,625,000
P4,875,000
4,325,000
P 550,000
10,000,000
225,000
4,525,000
2,375,000
3,325,000
P 5,700,000
5,475,000
P
225,000

Chapter 1 AA2 (2014 edition)

Accounts Receivable
Inventories
Property. Plant, and Equipment
Goodwill
Cash
Current Liabilities
Consideration transferred
FMV of net assets acquired
Goodwill
Expenses of Business Combination
Cash
Requirement 2
Cash
Current Liabilities
Accounts Receivable
Inventories
Property, Plant, and Equipment
Retained Earnings
Ordinary Share Capital
Retained Earnings
Cash
Exercise 1 6
1. Accounts Receivable
Inventories
Property Plant and Equipment
Goodwill
Cash
Current Liabilities
Estimated Liability for contingent Consideration

page 2

120,000
140,000
300,000
40,000
550,000
50,000
P550,000
510,000
P 40,000
5,000
5,000
550,000
50,000
120,000
100,000
280,000
100,000
200,000
350,000
550,000
120,000
140,000
300,000
60,000
550,000
50,000
20,000

Consideration transferred
Contingent consideration P100,000 x 20%
Total
FMV of net assets acquired
Goodwill
2.
3.

4.
5.

P550,000
20,000
P570,000
510,000
P 60,000

Goodwill (P60,000 P20,000)

Estimated Liability for Contingent Consideration

40,000

Goodwill
Estimated Liability for Contingent Consideration

15,000

Estimated Liability for Contingent Consideration

Goodwill
Estimated Liability for Contingent Consideration
Loss on Estimated Liability for contingent Consideration

40,000
15,000
5,000
5,000
70,000
30,000

Chapter 1 AA2 (2014 edition)

page 3

Cash
Exercise 1 7
1. Current Assets
Plant Assets
Patent
Current Liabilities
Long term Liabilities
Cash
Ordinary Share Capital 50,000 x 5 par
Additional Paid in Capital 50,000 x P9
Gain on Bargain Purchase

100,000
575,000
1,200,000
50,000
300,000
450,000
300,000
250,000
450,000
75,000

Consideration transferred:
Cash
Ordinary Share Capital 50,000 x P14
Total
FMV of net assets acquired
Gain in Bargain Purchase
Expenses of Business Combination
Additional Paid in Capital
Cash
2.

Plant Assets (P1,500,000 P1,200,000)

Gain on Bargain Purchase

P 300,000
700,000
P1,000,000
1,075,000
P 75,000
75,000
50,000
125,000
300,000
300,000

Consideration transferred:
Cash
Ordinary Share Capital 50,000 x P14
Total
FMV of net assets acquired
Gain in Bargain Purchase
3.

Current Assets
Plant Assets
Patent
Current Liabilities
Long term Liabilities
Cash
Ordinary Share Capital 50,000 x 5 par
Additional Paid in Capital 50,000 x P9
Paid in Capital for Contingent Consideration
Gain on Bargain Purchase
Consideration transferred:
Cash
Ordinary Share Capital 50,000 x P14
Stock Contingent Consideration
Total
FMV of net assets acquired
Gain in Bargain Purchase

P 300,000
700,000
P1,000,000
1,375,000
P 375,000
575,000
1,200,000
50,000
300,000
450,000
300,000
250,000
450,000
30,000
45,000
P 300,000
700,000
30,000
P1,030,000
1,075,000
P 45,000

Chapter 1 AA2 (2014 edition)

4.

page 4

Paid in Capital for Contingent Consideration

Ordinary Share Capital 5,000 x 5par
Additional Paid in Capital

30,000

Additional Paid in Capital

Ordinary Share Capital 4,000 x 5par

20,000

25,000
5,000
20,000

Prior to the termination of the contingency, the stock contingency is described through a
footnote.
5.

Additional Paid in Capital

Ordinary Share Capital 20,000 x 5par
14 10 = P4 x 50,000 = P200,000/10 = 20,000 shs.

100,000
100,000

Prior to the termination of the contingency, the stock contingency is described through a
footnote.
Exercise 1- 8
Consideration transferred
Non-controlling interest
P42,500,000 x 20%
P50,000,000 P12,000,000/80% x 20%
Total
Fair market value of net assets acquired
Goodwill

No. 1
P50,000,000

No. 2
P50,000,000

8,500,000
P58,500,000
42,500,000
P16,000,000

9,500,000
P59,500,000
42,500,000
P17,000,000

Exercise 1 9
1. P4,800,000/60% x 20% = P1,600,000
2.

Fair value of net assets

Book value of net assets
Undervaluation of net assets

Consideration transferred
Fair value of previously held equity interest
Fair value of non controlling interest
Total
FMV of net assets
Goodwill

4.

Fair value of previously held equity interest

Cost of 20% interest
Gain on the acquisition

P1,600,000
1,200,000
P 400,000

5.

Consideration transferred

P4,800,000/
60%
P8,000,000
x 20%
P1,600,000

Remeasured fair value of net assets

Non controlling interest

P7,700,000
6,900,000
P 800,000
P4,800,000
1,600,000
1,600,000
P8,000,000
7,700,000
P 300,000

Chapter 1 AA2 (2014 edition)

page 5

Exercise 1 - 10
1. Assets, other than goodwill
Goodwill
Liabilities
Ordinary Share Capital
Net asset contribution
Goodwill contribution
Average earnings
Normal earnings
Excess earnings
Capitalization rate
Goodwill
Total contribution
Share capital distribution

550,000
196,000
230,000
516,000
Co. A
P 90,000

Co. B
P120,000

Co. C
P110,000

Total
P320,000

P 16,000
10,800
P 5,200
10%
P 52,000
P142,000
14,200 sh

P 20,000
14,400
P 5,600
10%
P 56,000
P176,000
17,600 sh

P 22,000
13,200
P 8,800
10%
P 88,000
P198,000
19,800 sh

196,000
P516,000
51,600 sh

2. Assets
Liabilities
Ordinary Share Capital
Co. A
142,000/516,000 x 32,000 sh
Co. B
176,000/516,000 x 32,000 sh
Co. C
198,000/516,000 x 32,000 sh

550,000
230,000
320,000
8,806 sh
10,915 sh
12,279 sh

Exercise 1 - 11
Total contribution (P50,000 / 10%)
Net asset contribution equal to preference shares issued
Goodwill contribution equal to ordinary shares issued

P500,000
400,000
P100,000

Preference Share Capital (P400,000/P100)

Ordinary Share Capital (P100,000/P50)
Exercise 1 - 12
1.
1,500 shares/2,000 shares x 100 shares
2.
1,500 shares x P150
3.
1,000 shares x P150
4.
P500,000/2,000 shares x 100 shares

4,000 shares
2,000 shares
= 75 shares
= P225,000
= P150,000
= P 25,000

PROBLEMS
Problem 1 - 1
1.
Cash
Accounts Receivable
Inventory
Goodwill
Land
Long-term Investment in Marketable Securities
Equipment
Accounts Payable
Ordinary Share Capital (6,000 @ 50)
APIC

100,000
150,000
140,000
35,000
120,000
140,000
180,000
115,000
300,000
450,000

Chapter 1 AA2 (2014 edition)

Consideration transferred
FMV of net assets acquired
Goodwill

2.

63,000
140,000

Investment in Canada Co. (6,000 x P125)

Ordinary Share Capital (6,000 x P50)
Additional Paid - In Capital (6,000 x P75)

750,000

Additional Paid in Capital

Expenses
Cash

63,000
140,000

Cash
Accounts Receivable
Inventory
Land
Long term Investment
Equipment
Goodwill
Accounts Payable
Paid in Capital from Contingent Consideration
Ordinary Share Capital (6,000 @ 50)
APIC
Consideration transferred 6,000 @ 125
Stock Contingent Consideration
Total
FMV of net assets acquired
Goodwill
Additional Paid in Capital
Expenses of Business Combination
Cash

3.

P750,000
715,000
P 35,000

Additional Paid in Capital

Expenses of Business Combination
Cash

Problem 1 - 2
1.
Land
Goodwill
2.

page 6

203,000
300,000
450,000

203,000
30,000
30,000
100,000
150,000
140,000
120,000
140,000
180,000
135,000
115,000
100,000
300,000
450,000
P750,000
100,000
P850,000
715,000
P135,000
63,000
140,000
203,000

Paid in Capital from Contingent Consideration

Ordinary Share Capital 1,000 @ P50
Additional Paid in Capital

100,000

Additional Paid in Capital

Ordinary Share Capital 2,000 @ P50

100,000

50,000
50,000
100,000

Prior to the termination of the contingency, the stock contingency is described through a footnote.

Chapter 1 AA2 (2014 edition)

4.

page 7

Additional Paid in Capital

Ordinary Share Capital 1,500 @ P50
125 100 = 25 x 6,000 = P150,000/100 = 1,500

75,000
75,000

Prior to the termination of the contingency, the stock contingency is described through a footnote.
Problem 1 - 3
1. Investment in Share Capital (75,000 @ P14)
Ordinary Share Capital (75,000 @ P10)
Ordinary Share Premium(75,000 x P4)
2. Additional Paid-in Capital (40,000 @ P4) =
Retained Earnings

1,050,000
750,000
300,000
P160,000
zero

Problem 1 - 4
1.
Cash
Accounts Receivable
Inventories
Non Current Marketable Securities
Property Plant and Equipment
Land
Goodwill
Current Liabilities
Long Term Debt
Cash
Estimated Liability for Contingent Consideration
Consideration transferred:
Cash
Contingent Consideration P80,000 x 40%
Total
FMV of net assets acquired
Goodwill
2.
3.
4.
5.

3,000
8,000
20,000
55,000
50,000
28,000
52,000
4,000
20,000
160,000
32,000
P160,000
32,000
P192,000
140,000
P 52,000

Goodwill
Estimated Liability for Contingent Consideration

18,000

Goodwill
Estimated Liability for Contingent Consideration

5,000

Goodwill
Estimated Liability for Contingent Consideration

5,000

Estimated Liability for Contingent Consideration

Loss on Estimated Contingent Consideration
Cash

18,000
5,000
5,000
60,000
20,000

Problem 1 - 5
1
FMV of net assets of Commander Co. [(P200,000 + P800,000) - P200,000]
MV of share capital of General Co.

80,000
P800,000
P40

Chapter 1 AA2 (2014 edition)

page 8

No. of shares to be issued

Share exchange ratio (20,000 sh/10,000 sh)

20,000 sh
2:1

Investment in Commander Co. (20,000 x P40)

Ordinary Share Capital (20,000 x P10)
Paid - In Capital in Excess of Par (20,000 x P30)
Problem 1 - 6
Company A
Company B
Net tangible assets
P400,000
P200,000
Expected annual earnings
60,000
40,000
Rate of return on net tangible
Assets
15%
20%
Ratio of earnings distribution
before combination
30%
20%
Share distribution (earnings
capitalized at 8%)
Preference shares
4,000 sh
2,000 sh
Ordinary shares
3,500 sh
3,000 sh
Earnings distribution:
Preference shares
a.
P20,000
P10,000
b.
20,000
10,000
c.
32,000
16,000

800,000
200,000
600,000
Company C
P1,000,000
100,000

Total
P1,600,000
200,000

10%
50%

100%

10,000 sh
2,500 sh

16,000 sh
9,000 sh

P50,000
50,000
80,000

P 80,000
80,000
128,000

Ordinary shares

a.
b.
c.

P 7,778
17,500
28,000

P 6,667
15,000
24,000

P 5,555
12,500
20,000

P 20,000
45,000
72,000

Total

a.
b.
c.

P27,778
37,500
60,000

P16,667
25,000
40,000

P55,555
62,500
100,000

P100,000
125,000
200,000

Ratio of earnings distribution

after combination
a.
b.
c.
Problem 1 - 7
Requirement 1

27.78%
30.00%
30.00%

16.67%
20.00%
20.00%

55.55%
50.00%
50.00%

100%
100%
100%

Plan A
Assets, other than Goodwill
Goodwill
Ordinary Share Capital, P10 par
Net asset contribution
Goodwill contribution
Est. annual earnings
Normal earnings
Excess earnings
Capitalization rate
Goodwill
Total contribution

6,000,000
1,000,000
7,000,000
Co.D
P3,000,000

Co. E
P1,500,000

Co. F
P1,500,000

Total
P6,000,000

P 300,000
240,000
P 60,000
12%
P 500,000
P3,500,000

P 165,000
120,000
P 45,000
12%
P 375,000
P1,875,000

P 135,000
120,000
P 15,000
12%
P 125,000
P1,625,000

1,000,000
P7,000,000

Chapter 1 AA2 (2014 edition)

page 9

Ordinary share dist.

350,000 sh

187,500 sh

162,500 sh

700,000 sh

Plan B
Assets, other than Goodwill
Goodwill
Preference Share Capital, P10 par
Ordinary Share Capital, P10 par

6,000,000
2,000,000
6,000,000
2,000,000
Co. D

Total contributions
(Earnings/8%)
Net asset contribution
Goodwill contribution
Preference share dist.
equal to NA cont.
Ordinary share dist.
equal to earnings cont.

P4,000,000
3,750,000
P 250,000

Co. E
P2,200,000
2,062,500
P 137,500

Co. F

Total

P1,800,000
1,687,500
P 112,500

P8,000,000
7,500,000
P 500,000

375,000 sh

206,250 sh

168,750 sh

750,000 sh

25,000 sh

13,750 sh

11,250 sh

50,000 sh

Requirement 2
Plan A
Co. D
Co. E
Co. F

350,000/700,000 x P600,000
187,500/700,000 x P600,000
162,500/700,000 x P600,000

P300,000
160,714
139,286
P600,000
Plan B
Preference
P450,000
112,500

Regular dividends at 6%
Balance P120,000 x 7,500/8,000
P120,000 x 500/8,000
Total
P562,500
Dividends per share
P .75
Co. D
Co. E
Preference Share Capital
P281,250.00
P154,687.50
Ordinary Share Capital
18,750.00
10,312.50
Total
P300,000.00
P165,000.00

Ordinary
P 30,000
7,500
P37,500
P .75
Co. F
P126,562.50
8,437.50
P135,000.00

MULTIPLE CHOICE
6. A
11. D
7. A
12. C
8. A
13. A
9. D
14. C
10. C
15. C

1- A.

1.
2.
3.
4.
5.

A
B
C
C
D

1 B

1.

Consideration transferred
Fair market value of net assets acquired
Gain on Bargain Purchase/Negative Goodwill

1C

1.

Consideration transferred
FMV of net assets
(P1,890,000 + P2,900,000 P1,140,000)
Credit to profit and loss

Total
P480,000
112,500
7,500
P600,000
TOTAL
P562,500.00
37,500.00
P600,000.00

16. C
17. A
18. B
19. B
20. C
P80,000
90,000
P10,000
P2,650,000
3,650,000
P 1,000,000

Chapter 1 AA2 (2014 edition)

1 D

1.

Consideration transferred
FMV of net assets acquired
(P3,239,600 171,600)
Goodwill

page 10

P3,068,000
3,068,000
Zero

1E

1.

Retained Earnings of the surviving company remains the same since no

part of the acquired companys Retained Earnings is recorded upon
combination.

1 F

1.

Total assets of Pacino before the combination

Assets acquired from Lucky
Goodwill recorded upon combination
Total assets after the combination

P1,097,500
1,733,250
850,000
P3,680,750

Consideration transferred (200,000 sh @ P11)

Net assets acquired (P1,733,250 P383,250)
Goodwill

P2,200,000
1,350,000
P 850,000

1-G

1.

Customers Lists
Research and Development
Operating Lease
Goodwill

1-H

1.

1I

1.

The retained earnings of the acquiring company

2.

APIC in shares issued to the 3 acquired co. (P100,000 x 2)

APIC of Co. U
1 J

1- K

1.

1.

P 90,000
220,000
25,000
P335,000

P200,000
15,000
P215,000

Amount paid plus the contingent consideration that is recognized because

the contingent consideration is probable and can be reasonably estimated at
the date of acquisition.

P285 P200 = P85 million

1- L

1.

P200 P145 = P55 million. The P160 million fair value is beyond the one
year measurement period.

1- M

1.

P2,200,000 (P2,000,000 x 80%) = P600,000

1- N

1.

(1) P100 + (P85 x 20%)= P117 P85 = P32 million

(2) (P100 P24)/80% x 20% = P19 + P100 P85 = P34 million

1- O

1.

P900,000 (P1,200,000 x 60%) = P180,000

Gain on bargain purchase is reported in the income statement

Chapter 1 AA2 (2014 edition)

page 11

1- P

1.

50,000 @ P18= P900,000

1- Q

1.

P90 P82 = P8 gain on bargain purchase recognized in profit and loss

1 R.

1.

Average earnings
Normal earnings (P300,000 x 8%)
Excess earnings
Goodwill (P26,000/10%)

P 50,000
24,000
P 26,000
P260,000

2.

Average earnings
Normal earnings (P400,000 x 8%)
Excess earnings
Goodwill (P48,000/10%)
Net asset contribution
Total contribution

P 80,000
32,000
P 48,000
P480,000
400,000
P880,000

1S

1.

JPE = [P25,000 (P250,000 x 6%)]/10%

FPJ = [P14,000 (P150,000 x 8%)]/10%
Total goodwill

1T

1.

Average earnings
Normal earnings (P1,200,000 x 10%)
Excess earnings
Capitalization rate
Goodwill

2.

Consideration transferred
FMV of net assets acquired
(P520,000 + P1,480,000 P800,000)
Goodwill

1U

1.

C
Expected annual earnings
Capitalization rate
Total contribution
Asset contribution equal to
preference shares
Goodwill equal to ord. sh
Par value of ord. shares
Ordinary shares dist.

1V

1 W

1.
2.

1.

B
D

Abner
P 36,000
8%
P450,000
400,000
P 50,000
P10
5,000 sh

P 100,000
50,000
P 150,000
P300,000
120,000
P180,000
25%
P720,000
P1,500,000
1,200,000
P 300,000
Bertha
80,000
8%
P1,000,000

800,000
P 200,000
P10
20,000 sh

800,000
P 400,000
P10
40,000 sh

(P3,800,000 - P2,500,000)/P100
Excess earnings = P481,000 (P1,300,000 x 15%)
Goodwill equal to par value of ordinary share
to be issued = P286,000/20%
Premium on ordinary share = P1,430,000 x 50%

C
Earnings contribution

Frannie
P 30,000

Charlie
96,000
8%
P1,200,000

Giselle
P 30,000

Hazel
P 40,000

13,000 sh
P 286,000
P1,430,000
P 715,000
Total
P 100,000

Chapter 1 AA2 (2014 edition)

page 12

Normal
earnings
12,000
(6%)
Excess earnings
P 18,000
Capitalization rate
20%
Goodwill
P 90,000
Asset contribution
200,000
Total contribution
P290,000
Share capital dist.
290/1,200 x 1,000
242 sh
360/1,200 x 1,000
550/1,200 x 1,000
1 X

1.

A
Estimated earnings
Normal
earnings
(6%)
Excess earnings
Capitalization rate
Goodwill
Asset contribution
Total contribution
Share capital dist %
458,750/1,800,000
900,000/1,800,000
431,250/1,800,000

18,000

30,000

P 12,000
20%
P 60,000
300,000
P360,000

P 10,000
20%
P 50,000
500,000
P550,000

60,000
P

40,000
20%
P 200,000
1,000,000
P1,200,000

300 sh
458 sh

1,000 sh

Polar
P 41,250
22,500

Quickie
P 75,000
45,000

Robot
P 33,750
22,500

Total
P 150,000
90,000

P 18,750
20%
P 93,750
375,000
P458,750

P 30,000
20%
P150,000
750,000
P900,000

P 11,250
20%
P 56,250
375,000
P431,250

60,000
20%
P 300,000
1,500,000
P1,800,000

26%
50%

1Y

1.

Ordinary Share Capital

Par value per share
Number of shares outstanding
4,000 sh / 5,000 sh

1Z

1.

FMV of net assets equal of MV of share capital

MV per share
Number of shares to be issued

24%
P250,000
P50
5,000
.80
P2,000,000
P100
20,000 sh